PUCT Finalizes Decision on Raising System-wide Offer Cap for the Next Several Years

On Oct. 25, 2012, the Public Utilities Commission of Texas (PUCT) voted to increase the level of the scarcity price signal in ERCOT by increasing the system-wide offer cap for 2013 and beyond. This comes after they voted in late June to increase the offer cap and the power balance penalty curve to $4,500 per MWh (from $3,000). This change took effect on August 1, 2012. The October decision set the system-wide offer cap at the following levels, effective on the dates below:

$5,000 on June 1, 2013$7,000 on June 1, 2014$9,000 on June 1, 2015

During scarcity conditions, the ERCOT energy-only market design primarily relies on administrative price-setting to establish scarcity prices. The power balance penalty curve is the administrative mechanism that sets prices primarily when the ERCOT grid is in an emergency condition and ERCOT is relying on reserves to meet system demand.

Example: if ERCOT operating reserves decrease to emergency levels, then the power balance penalty curve administratively sets the price at $3,000 per MWh, which is the current offer cap approved by the Commission in ERCOT. The ERCOT market hit that cap for approximately 20 hours (intervals) during the 2011 summer heat wave. With hot summer weather still ahead and the offer cap moving to $4,500 in August, there is a possibility that the market could reach the cap again.

The Electric Reliability Council of Texas (ERCOT) market currently faces high uncertainty as to whether or not there is sufficient generation capacity to provide reliable supply of electricity in the future.

The following factors increased concerns for resource adequacy:

The record demand in the summer of 2011, caused by extreme heat, led to threats of rolling blackouts

The potential impact of pending/proposed environmental regulations, such as the Environmental Protection Agency's Cross-state Air Pollution Rule (CSAPR) on coal-fired generation in ERCOT

Suspension and cancellation of power generation projects due to market conditions

Tight capital markets

Low natural gas prices

What is scarcity pricing?

Scarcity pricing refers to the value of energy during periods when demand for energy could exceed energy supply.

ERCOT currently forecasts a reserve margin of 13.99% in 2012, which is barely above the minimum target of 13.75% and they have estimated that the reserve margin will drop below the minimum target of 13.75% in 2013 and beyond. Click here for a press release from ERCOT on this topic.

Does the ERCOT Market Support Adequate Generation Development?

The concern regarding adequate generation in ERCOT has intensified the ongoing debate as to whether or not the energy-only market design in ERCOT will support adequate generation development. Proceedings at the Public Utility Commission of Texas (PUCT) and the ERCOT stakeholder process aimed at increasing scarcity price signals in ERCOT have been ongoing since summer 2011. The issue of whether scarcity pricing is adequate to support new investment has two dimensions for analysis:

the level of high prices

the frequency of high prices

The Commission recently has approved market rule changes designed to increase the frequency and duration of scarcity price signals in ERCOT. The focus of these market rules has been on mitigating the impact of ERCOT reliability actions that interfere with the formation of scarcity prices.

When the ERCOT reserve margin approaches emergency levels, ERCOT operators will deploy additional generation in an attempt to prevent an emergency condition. This additional generation is procured by ERCOT in the ancillary service market (Non-Spinning Reserve Service, Responsive Reserve Service and Regulation Up) or through out-of-market mechanisms (Reliability Must Run and Reliability Unit Commitment). The following initiatives (summarized below) are designed to send scarcity price signals when ERCOT deploys these ancillary services:

Administrative offer floor during Non-Spinning Reserve Service (NSRS) deployment of $120 per MWh for online resources and $180 per MWh for offline resources. (ERCOT Board approval and implementation occurred on January 5, 2012.)

Offers should be at system-wide offer cap (currently $3,000 per MWh) for Responsive Reserve Service (RRS) & Regulation Up service deployed for system capacity purposes. (ERCOT Board approval and implementation occurred on January 5, 2012.)

Our Texas Government & Regulatory Affairs team is actively involved in the Commission's processes and decisions and we will continue to provide you with regulatory updates on the ERCOT as they become available. Please contact your Direct Energy Business Sales Representative with questions or for more information.

General Signals:

Overview

There are two primary administrative caps on wholesale electricity prices in ERCOT.

System-wide Offer Cap: which is set by PUC rule and currently limits offers to sell electricity to no more than $3,000 per MWh.

Power Balance Penalty Curve: which is not really a cap but something that is used by ERCOT to determine energy prices as the amount of energy supplied by the market approaches the total amount available.

In markets for most other types of products, when demand exceeds supply, the price of the product rises to the maximum amount buyers are willing to pay for the limited supply.

The ERCOT wholesale market does not presently allow all electricity users to bid into the market. Instead of having buyers set the price as demand approaches the total available supply, ERCOT uses the Power Balance Penalty Curve as a proxy.